The Secret To Successfully Launching & Funding Your Startup

It was in the fall of the year was 2000 – the year the internet bubble had burst – and I was sitting in a hotel conference room with two dozen other internet entrepreneurs listening to Michael Dell describe three things that kept him up at night while running Dell Computer. Those of us in the room were the CEOs that Michael had invested in via Dell Ventures. We all led red-hot dot coms that had cooled so fast in the market meltdown that the reality of our situation hadn’t fully sunk in yet.

Michael was describing his definition of “liquidity”, one of the three things he said he cared most about:

“I’m always fine-tuning our business model. I keep a close eye on our cash cycle of when we get paid by the customer vs. when we have to pay our suppliers. We tightly track our sales forecast so we know when we have to break ground on another facility as we continue to scale because I want to finance any CapEx with internal cash flow rather than go back to the public markets. Knowing the cash requirements of our business model at Dell is critical to our success.”

 

I sat up straight and listened intently and soberly. I was running a 16 month-old SaaS company with 17 million USD in revenue and I had no idea how our business model really played out in terms of the cash cycle – the timing of our outflows of cash vs. the inflows of cash from customers. I flipped open my complimentary Dell-branded leather folio and started quickly sketching out a timeline and some high-level estimates of what it cost us to build the infrastructure for each new customer, what it cost us to acquire a new customer, and when the customer actually paid us. It was frightening. It would appear that each new customer cost us 600,000 USD well in advance of our actual cash margins of only 25,000 USD per month that started coming in about 9 to 12 months later when our solution finally went “live”. It was the very first time I had even thought about our financial model (a little late in the game). I called my CFO during our next break in a near panic as told him “we have a cash cycle issue…”.

It suddenly made sense to me why we had already burned through our 30 million USD of venture capital and why I was on the street trying to raise another 45 million. We were burning through cash in our attempt to grow our business and I was just learning the lesson of the importance of a financial model. My panic quickly widened as I reminded myself of each new large cash commitment I had just made: our new European office in Amsterdam, the email marketing company I was in the middle of negotiating to acquire in the hotel hallway just before the session with Michael, and our 5 to 15 new hires each week. We were an absolutely out-of-control startup. I was about to head into the most stressful period of my life.

Startup Failure Is The Norm

According to Harvard Business School research, 70 to 80 percent of all startups fail to deliver a return on investment to investors and a whopping 90 to 95 percent fall short of meeting projections. Many experts agree that between 50 percent and 90 percent of all startups shut down completely within the first few years.

Harvard Business School’s Shikhar Ghosh explains the problem like this:

“Failure is the norm. Startups often fail because founders and investors neglect to look before they leap, surging forward with plans without taking the time to realize that the base assumption of the business plan is wrong.”

A Startup Financial Model Is Essential For Success

I had raised that first 30 million USD with nothing more than a PowerPoint presentation and one-page spread sheet I had whipped up in 15 minutes with an investment banking friend that was five columns wide – one for each year – and a wildly optimistic revenue number and a total guess at a few annual cost buckets. As the founder & CEO of the company, I had no financial model, no plan, and no clue. I didn’t know what I didn’t know. I hadn’t yet learned the importance of “unit economics” – what it cost to acquire, set up, and manage a single customer relationship. Therefore, it was very difficult to understand the financial impact as we scaled up.

A detailed financial model is absolutely critical for every startup. Every entrepreneur needs to fully understand and take responsibility for every aspect of the startup’s financial model. It’s essential when raising capital, during your launch phase, and when planning your growth. A detailed model will help you avoid surprises and anticipate the timing and cash requirements.

Also, investors will demand such a model and will demand your understanding of it (unlike in the dot com boom when cash was just wired into our accounts). A startup financial model should be one of the primary aspects of any business plan and it is the biggest part of any investor’s due diligence. In fact, you are likely to get many more questions about your financial model that you will about your product.

The Ideal Startup Financial Model

Ideally a startup financial model enables the entrepreneur/startup team to do the following:

• All offerings are easily modeled on a unit economic basis with all revenue and costs associated with each offering.
• All types of revenue and sales models are easily input and changed: from recurring to one-time, from billing in advance to billing in arrears, and from cash collections to deferred revenue.
• All expenses are easily input and changed: from lead generation to revenue sharing and from adding employees to occupancy expenses.
• The cash requirements and the timing of required capital raises is easy to see and change as needed.
• All assumptions are clear, can easily be changed or tested, and their impact flows completely through a fully-integrated model from the Income Statement to the Balance Sheet to the Cash Flow statement to the Cap Table and to the Investor Return Summary.
• Every aspect of the model can quickly and easily be fine-tuned to test every scenario and to arrive at reasonable assumptions and rates of growth and expected earnings.

The Ideal Startup Financial Model Is Extremely Complex

The problem with developing the ideal financial model as described above is that the typical entrepreneur lacks the time, money, and expertise to invest in an expensive, detailed financial model. Entrepreneurs are usually the product visionary or have sales and marketing DNA and are almost never from a finance or accounting background. Therefore, the typical default is one of the following scenarios:

• Throw a few numbers on a spreadsheet like I had done.
• Try to find a “finance-type” co-founder (who is likely to be as inexperienced as the CEO in terms of startup financial modeling).
• Hire someone to build a model for you while trying to translate what you are doing (which will be time consuming and frustrating) and you will end up with a very expensive model (costing you thousands if not tens of thousands of Euros), that is very inflexible, has lots of hard-coded formulas that are not dynamic, and is almost impossible to keep improving because of the mystery of how it works or how it was built.

In any case, you are highly unlikely to get the model you need.

The Genesis Of The Startup Financial Model

I was able to raise another 45 million USD and finally sold the company, but it was not a good outcome for anyone. After that bruising experience in 2000, I went on to plan my next startup, which has turned into a highly-successful Inc. 5000 company in the U.S. This time, I built the financial model myself during the year that I planned the launch. I then later reworked that same model for a company I invested in as an angel investor. I continued to rework the model again and again for any company I started, advised, or invested in over the next 10 years. I kept evolving the model and kept improving my ability to reuse it. Eventually, it became such an easy-to-use template for nearly any business type and model that I decided to share the model with other entrepreneurs to help them be more successful with their startups.

Since then, thousands of entrepreneurs from all over the world have used my easy-to-use app with its 860,000+ calculations to plan, fund, and launch their ventures. Few things are more satisfying than to hear from fellow entrepreneurs about how much they love my product and how they were able to successfully launch their startup.

 

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